Wednesday, November 25, 2015

Updating two mid-cycle consumer spending patterns

- by New Deal democrat

Three years ago, I identified a consistent pattern whereby retail sales grew faster than the broader category of personal consumption expenditures early in an expansion, but slower later in an expansion. Retail sales constitute about 50% of PCE's. Note, however, that real retail sales are much more volatile. And, as this graph below (subtracting YoY PCE growth from YoY real retail sales growth through 1997) shows, in a very specific and non-random way:

Retail sales minus PCE's are always negative before the economy ever tips into recession. That's 11 of 11 times. Further, in 10 of those 11 times (1957 being the noteworthy exception), the number was not just negative, but was continuing to decline for a significant period before we tipped into recession.

So what does it look like now? Here is the updated graph of the YoY% change in real personal consumption expenditures (blue) vs. real retail sales (red):

This strongly suggests we are in the late stages of the economic expansion. Both are decelerating YoY, retail sales more than personal consumption expenditurres.

Secondly, the YoY% growth in personal consumptioin expnditures on durable goods tends decelerate before spending on non-durable goods. Here is the graph of that relationship through the 1980s:

and here it is through the present:

This also suggests that we are getting later in the cycle, but interestngly, durable goods are holding up much better than nondurable goods.

At the same time, none of these have turned negative -- just less positive. There is no imminent threat of a downturn.